WHAT IS INSOLVENCY AND BANKRUPTCY CODE?

The Insolvency and Bankruptcy Code, 2016 was designed for consolidating and amending
the laws pertaining to reorganization as well as resolution of insolvency of corporate
individuals, partnership companies as well as individuals in a timely manner. The code was
passed to maximize the value of the assets of these individuals for promoting
entrepreneurship, credit availability as well as balance the stakeholders’ interests.

Insolvency and Bankruptcy Code 2016 was passed as per the act passed by Parliament and
was put into effect on 28th May 2016 after getting the presidential assent and it tends to
replace three of the existing laws on insolvency and bankruptcy. Some of its provisions and
amendments were being imposed since then.

The Insolvency and Bankruptcy Code 2016 was passed by the parliament to achieve below
mentioned bankruptcy laws -

• To improve and facilitate the business arena in India. People should be easily available to
disperse loans to harness the entrepreneurs in the country without being worried about the
security of the recovery of their loans.

• This law helps lenders and creditors have fast recovery of the debts as it is time bound
unlike other legislative facilities in India which may extend for years without any resolution.

• This was done so that even foreign investors can invest in businesses in India with ease
and better credit perspective are available for the Indian businessmen to increase and
expand their business.

• It also helps the country to improve its economic growth and development.

Key Highlights of Insolvency and Bankruptcy code 2016:

• Previously the average time to resolve the insolvency was around four years which is cut
down to six months by this code.

• This insolvency and bankruptcy code 2016 will attract further foreign investment with
proven results of effective and speedy functioning of the insolvency and liquidation process.
Hence it will be a key factor to sustain economic growth in the country through foreign
investments. This would also give banks and other investors’ confidence in putting their
money into Indian entrepreneurs.

• The code is applicable to companies, limited liability firms, other firms, and individuals.

• This insolvency and bankruptcy code 2016 includes two processes that is Insolvency
Resolution and second is liquidation.

• This code having considered the Mallya saga it attempted to address cross border
insolvency as well.

• The properties considered for insolvency resolution and liquidation under the code are
money, goods, actionable claims, land. This could be either in India or outside. With help of
Central Government, the code can also be re-enforced outside the country.

• This insolvency and bankruptcy code 2016 is mother of all laws as it consolidates and
surpasses all the laws of revival, restructuring, winding up and reorganization of any sick or
debt oriented industry.

• It also provides an opportunity for professionals like advocates, lawyers, Chartered

Accountants, Company Secretaries, Cost Accountants and Valuers to become Resolution
Professionals by obtaining the license under the code and practice.

• The code includes the process to be followed to declare an individual, company or a

partnership firm to be insolvent. Under insolvency and bankruptcy code 2016 both debtor
and creditor can initiate the recovery procedure of the bad loans.

• Insolvency and bankruptcy board is the regulator for governing the insolvency and
bankruptcy code 2016 proceedings. IBBI includes ten members who are from finance
ministry and law ministry.

Insolvency and bankruptcy code 2016 have announced two tribunals who shall be authorized
to resolve the insolvency issues and thus will pronounce the judgement. One of them
is National Company Law Tribunal which will take care of insolvency and bankruptcy code
2016 proceedings for companies and another is Debt Recovery Tribunal which will govern
the insolvency and bankruptcy code 2016 proceedings for the individuals.
Salient Features of Insolvency and Bankruptcy Code 2016

Following are the key features of Insolvency and Bankruptcy Code:

1. Resolution of Insolvency:

The Insolvency and Bankruptcy Code, 2016 lays down the separate insolvency resolving
procedures for companies, individuals as well as partnership companies. It is possible to
initiate the procedure either by the creditors or the debtors. The code lays down a maximum
time period for completing the insolvency resolution procedure for individuals and
corporates. In the case of a company, the procedure must be fully completed in one hundred
and eighty days, which can later be stretched by ninety days only when a large percentage
of creditors permit or agree. On the other hand, in the case of start-ups (aside to the
partnership companies), small organizations as well as other organizations (having less than
Rs 1 crore worth of assets), the resolution procedure would be fulfilled within a period of
ninety days of initiating the required that can be further stretched by as many as 45 days.

2. Regulator of Insolvency:

The Code lays down that the Insolvency and Bankruptcy Board of India shall oversee the
proceedings related to insolvency in the nation and also regulate all the organizations that
have been registered by the board. The Insolvency and Bankruptcy Board shall consist of
ten members, which would also include the representatives of the Law and Finance ministries
as well as the RBI (Reserve Bank of India).

3. Licensed Insolvency Professionals:

The management of insolvency procedure shall be done by licensed insolvency

professionals. They would also exercise control on the debtor’s assets at the time of the
insolvency procedure.

4. Insolvency and Bankruptcy Adjudicator:

The Code has introduced two distinct tribunals for overseeing the procedure resolving
insolvency, for companies and individuals. These are (i) the National Company Law Tribunal
for organizations and Limited Liability Partnership companies; as well as (ii) the Debt
Recovery Tribunal for overseeing insolvency resolution for individuals as well as partnership
firms.

5. Procedure:

An insolvency plea is given to the authority that adjudicates (in corporate debtor’s case it is
NCLT) by operation or financial creditors or the corporate debtor. The plea can be accepted
or rejected in a maximum time period of fourteen days. In case the plea gets acceptance
then the tribunal will have to quickly appoint an IRP or Insolvency Resolution Professional
for drafting a plan of resolution within a period of 180 days (that can be extended by ninety
days). Following this, the court would initiate the process of resolving corporate insolvency.
For that particular period, the company’s directors shall remain suspended whereas the
promoters shall have no say in the company management. The Insolvency Resolution
Professional can seek help of the management of the company for handling everyday
operations. In case the CIRP is unable to revive the organization, then the process of
liquidation shall be initiated.

6. Amendments:

Certain individuals are prohibited from providing any plan of resolution in case there are
any defaults. Hence, willful defaulters, management or promoters of company in case there
is any non-performing outstanding debt for more than a year, as well as directors who have
been disqualified cannot submit any plan. Apart from this, the bill also places a restriction
on the selling of a defaulter’s property to any such individuals at the time of liquidation.
The Process of Bankruptcy in IBC Code 2016

After the insolvency resolution process fails, there is a provision of bankruptcy in Insolvency
and Bankruptcy Code, 2016. A direct application for bankruptcy cannot be submitted. As per
amendments to the Insolvency and Bankruptcy Board of India Regulations, 2016, the
application for bankruptcy must be filed within three months of order passed by
Adjudicating Authority against failure or insolvency resolution process.

It happens only when insolvency resolution process fails.

Following are the circumstances when a bankruptcy application can be made-

• When insolvency resolution process was rejected by Adjudicating Authority under section
100(4) stating that the application was made to defraud the creditors.

• When Adjudicating Authority has rejected insolvency resolution process as per section
115(2) stating that repayment plan submitted during insolvency process was not approved.

• When an insolvency resolution process has been rejected by Adjudicating as per section
118(3) stating that repayment plan approved during insolvency resolution process was
unsuccessful.

Procedure for Submitting an Application for Bankruptcy:

The application for bankruptcy must be made in prescribed format as mentioned in section
122(1) of Insolvency and Bankruptcy Code, 2016. The applicant also must submit the related
fee along with the application. It can be submitted by a debtor or a creditor. An unsecured
creditor must submit the application with documents mentioned in 123(1) of IBC Code 2016.
A secured creditor must submit the application with documents mentioned in section 123(2)
of Insolvency and Bankruptcy Code, 2016.

Applicant can also propose an insolvency resolution professional as bankruptcy trustee in

his application. The IBBI shall need to approve this proposal for that insolvency resolution
professional to act as bankruptcy trustee as prescribed in section 125 of Insolvency and
Bankruptcy Code, 2016.

Bankruptcy application, once submitted cannot be withdrawn without permission from the
Adjudicating Authority as mentioned in section 123(7) of Insolvency and Bankruptcy Code,
2016. The bankruptcy trustee shall be appointed after approval from IBBI. This bankruptcy
trustee shall be responsible for the estate of bankrupt as per section 79(9) of Insolvency and
Bankruptcy Code, 2016.

Process of Bankruptcy:

After application has been submitted, the IBBI shall pass an order of bankruptcy within
fourteen days of confirmation of bankruptcy trustee. With their bankruptcy order, the
adjudicating authority shall submit a copy of application for bankruptcy and a copy of
bankruptcy order to the bankrupt, creditors, and bankruptcy trustee. This bankruptcy order
shall be in effect until the debtor is discharged as per section 138 of Insolvency and
Bankruptcy Code, 2016.

Once the bankruptcy order is implied, below actions take place as per section 128(1) of
Insolvency and Bankruptcy Code, 2016:

• The estate of bankrupt shall vest in the bankruptcy trustee as per section 154 of bankruptcy
and insolvency act 2016.

• This estate shall then be divided amongst its creditors.

• The bankruptcy trustee appointed by IBBI shall charge his fee as prescribed in section 144(1)
of IBC Code 2016. This fee shall be part of proceeding of liquidating his assets to pay the
creditors after commencement of bankruptcy order. Once the report as prescribed in
section 137 to section 148(3) from bankruptcy trustee as submitted to committee of creditors
is approved, he can then be released from his duties.

These provisions for bankruptcy are part of IBBI (Insolvency Professionals) (Amendment)
Regulations, 2018.
Fast Track Insolvency Resolution Process for Corporate Persons under IBC

There is a provision for Fast Track Corporate Insolvency Resolution Process under the
Insolvency and Bankruptcy Code, 2016 and is applicable to small corporates as defined in
Section 55(2) of IBC Code 2016. These corporate debtors on whom this fast track Insolvency
Resolution process could be applied are corporate debtors who have assets and income
below a level as defined by the Central Government, or with such class of creditors or the
amount of debt as notified by Central Government or of any other category as may be
notified by Central Government. This fast track process is made part of IBC Code 2016 under
IBBI (Insolvency Professionals) (Amendment) Regulations, 2018.

The fast track Corporate Insolvency Resolution Process could be completed within 90 days
of its commencement however could be extended further by 45 days as per the decision of
Adjudicating Authority. More than this, the extension of an Insolvency Resolution case is not
allowed if it is being judged under fast track Corporate Insolvency Resolution Process.

An application for fast track process can be filed by a creditor or corporate debtor himself.
He can submit the application accompanied with the proof of him not being a defaulter in
means as specified by the IBBI and the proof of him being eligible for fast track insolvency
resolution process as defined in section 57 of the Insolvency and Bankruptcy Code, 2016.

The resolution plan for fast track corporate insolvency resolution shall contain the details of
resolution applicants and other stakeholders who would enable the committee to assess the
credibility of the resolution applicant as per Regulation 37(3) of IBBI which again became
part of IBC Code 2016 as per IBBI (Insolvency Professionals) (Amendment) Regulations, 2018.

The resolution professional will submit all the resolution plans which comply with
requirement as mention in the Insolvency and Bankruptcy Code, 2016. He shall also submit
the details of all the transactions like preferential transaction as defined under section 43 of
IBC Code 2016, under value transactions as defined under Section 45 and extortionate credit
transactions as defined under section 50 of IBC Code 2016 and fraudulent transactions. He
also must submit the copies of order of Adjudicating Authority in respect to these
transactions as mentioned in Regulation 38(2) of IBBI of Fast Track Insolvency Resolution
Process.

The process for conducting the corporate insolvency process is as defined under Chapter II
of Part II of the Insolvency and Bankruptcy Code, 2016 and provisions related to offences
and penalties applicable are as defined under Chapter VII of Part II of the Insolvency and
Bankruptcy Code, 2016.

The procedure for Fast Track Insolvency Resolution Process is defined in IBBI Regulations
2017. As per this procedure the company shall appoint an insolvency resolution professional
and a public announcement shall be made as per specified form A. Proof of claims shall be
obtained and committee of creditors shall be formed. The meeting of these creditors shall
be organized by Insolvency Professional who will then conduct the fast track process as per
process defined in Fast Track Insolvency Resolution for Corporate Persons Regulation, 2017
which came into effect from 5th October 2017.

Growth In Demand Of Insolvency Resolution Professionals

As most of the banks and financial institutions tend to try to resolve the bad loans cases
which are a burden on its capacity and pose a kind of risk to their ledger performance, there
is huge demand for insolvency resolution professionals. The most appropriate lot for
applying for insolvency professionals are chartered accountants, cost accountants and
company secretaries. These insolvency professionals will be required to oversee the process
and run the complete Insolvency resolution procedure for corporate entities.

Section 206 of the Insolvency and Bankruptcy Code, 2016 states that only a person who is
registered as insolvency professional with IBBI (Insolvency and Bankruptcy Board of India)
can provide insolvency professional services as per the code. He will conduct complete
corporate insolvency resolution process including the fast track process and shall be paid an
amount as part of insolvency resolution process cost.

There are preferably three insolvency professional agencies namely ICAI, ICSI and ICMAI
who regulates the insolvency professionals as it regulates the capacity for the same. As per
latest data, the ICAI have enrolled more than seven hundred CAs as insolvent professionals
in the year 2017 and is said to get more than 1000 more inquiries to get members enrolled
for the same.

The demand for insolvency resolution professionals gained momentum when the
government of India planned to have an eco-system in place under Insolvency and
Bankruptcy Code (IBC). These professionals will have a key role to play to govern the
complete procedure once the corporates file an insolvency case with National Company Law
Tribunal. Creditors will have to outsource the jobs to insolvency professionals to get a
company’s revival plan in place or to get it liquidated in a time bound manner, which will be
crucial to get the loans recovered from these companies.

IBBI or Insolvency and Bankruptcy Board of India was formed on 1st Oct 2016 under the
Insolvency and bankruptcy Code, 2016 (Code). IBBI regulates the professional as well as
processes. It has a regulatory oversight for Insolvency professionals, related agencies and
related information utilities as well. It enacts and enforces the rules of transactions like
corporate insolvency resolution, corporate liquidation, individual insolvency resolution and
individual bankruptcy under the Code.

IBBI is given responsibility to frame a process to have recovery proceedings in place and
conduct the exams which will enable Chartered Accountants, Cost Accountants and
Company Secretaries to qualify as insolvency professional. Even Advocates can partake this
course as per current legislation.

Insolvency Professionals can play any of the given roles – Act as Insolvency professionals,
consultants, drafting and filing of application, handling of complete work of an insolvency
professional when appointed and initiate liquidation process and act to distribute the
liquidated assets among creditors as per law.